ShawnXu Enterprises recorded the following transactions for the just completed J
ID: 2375220 • Letter: S
Question
ShawnXu Enterprises recorded the following transactions for the just completed January 2010:
a.
$89,000 in raw materials were requisitioned for use in production. Of this amount, $78,000 was for direct materials and the remainder was for indirect materials.
b.
Total labor wages of $132,000 were incurred and paid in cash. Of this amount, $112,000 was for direct labor and the remainder was for indirect labor.
c.
Additional manufacturing overhead costs of $143,000 were incurred and paid.
d.
Manufacturing overhead costs of $152,000 were applied to jobs using the company's predetermined overhead rate.
XuShawn, Inc. distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year.
Required:
1. What is the product's CM ratio? Show your work. 2 pts
2. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change? Show your work. 2 pts
3. . 3. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Use incremental analysis, please determine the impact of these changes on the Company%u2019s net operating income.
Would you recommend that the company do as the sales manager suggests?
Answer sheet for Part 3:
Incremental change in contribution margin: 3 pts
Less: incremental change in fixed expenses: 1.5 pts
Incremental change in net operating income: 1 pts
ShawnXu Enterprises recorded the following transactions for the just completed January 2010:
Explanation / Answer
1.
Contribution margin per unit = 20 %u2013 8 = $12
CM Ratio = 12/20 = 0.6
2.
Increase in net operating income = 75000 x 0.6 = $45,000
3.
Would you recommend that the company do as the sales manager suggests?
NO, since there is a decrease in net operating income.
New selling price = 20 x 0.9 = $18
New contribution margin = 18 %u2013 8 = $10
New fixed cost = $180,000 + $30,000 = $210,000
New sales = 18000 x 4/3 = 24000 units
Answer sheet for Part 3:
Incremental change in contribution margin: 3 pts
2 x (24000 - 18000) = $12,000
Less: incremental change in fixed expenses: 1.5 pts
-$30,000
Incremental change in net operating income: 1 pts
-$18,000
3.
Would you recommend that the company do as the sales manager suggests?
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